Manufacturing firms differ from trading firms because they produce goods instead of buying finished goods for resale. They prepare a Manufacturing Account to calculate the cost of production, which then feeds into the Trading Account.

Key Terms in Manufacturing Accounts

• Prime Cost: The direct cost of production = Direct Materials + Direct Labour + Direct Expenses
• Factory Overhead Costs: Indirect expenses of the factory, such as factory rent, supervisor salaries, depreciation of plant, and factory insurance
• Work in Progress (WIP): Partially completed goods at the end of the accounting period
• Production Cost (Cost of Production): Prime Cost + Factory Overhead Costs + Opening Work in Progress − Closing Work in Progress

Steps to Prepare the Statement of Financial Position for a Manufacturing Firm

1. Prepare the Manufacturing Account to find the Cost of Production
2. Prepare the Trading Account using Cost of Production instead of Purchases
3. Prepare the Profit and Loss Account to find Net Profit
4. Prepare the Statement of Financial Position listing all assets and liabilities

Layout of Manufacturing Account (Extract)

A partnership is a business owned by two or more persons. When a partner joins (admission) or leaves (retirement), the partnership's financial position must be restated. Partners maintain Capital Accounts and Current Accounts.

Partner Admission

When a new partner is admitted:

• The new partner brings capital into the business
• The new partner may pay goodwill (extra payment for the reputation of the business)
• The profit-sharing ratio changes
• Capital and Current accounts are adjusted

Partner Retirement

When a partner retires:

• The retiring partner receives payment for their share of capital, accumulated profits, and goodwill
• The remaining partners' capital accounts are adjusted
• The profit-sharing ratio among remaining partners may change

Treatment of Goodwill

Goodwill is the extra value of a business over its tangible assets. When a new partner joins, they may need to pay for goodwill. The journal entry is:

• Debit: Cash/Bank (with amount paid)
• Credit: Goodwill Account
• Then Credit: Old Partners' Capital Accounts (in old profit-sharing ratio)

A departmental store has different departments (such as Clothing, Electronics, Groceries). Each department trades separately, but common expenses are shared among departments.

Key Concepts

• Direct Expenses: Expenses that can be traced to a specific department (e.g., department manager's salary)
• Indirect (Joint) Expenses: Expenses that benefit all departments (e.g., rent, electricity, advertising)
• Inter-departmental Transfers: When goods are transferred from one department to another

Basis for Allocating Indirect Expenses

Steps to Prepare Departmental Statements

1. Prepare Departmental Trading Accounts for each department
2. Calculate Gross Profit for each department
3. Allocate Indirect Expenses to departments using appropriate bases
4. Prepare Departmental Profit and Loss Accounts
5. Prepare the combined Statement of Financial Position

Mwananyamala Department Store has two departments: Hardware and Textiles. The following Trial Balance was extracted on 31 December 2023:

Additional Information:

1. Stock at 31.12.2023: Hardware TShs 6,000; Textiles TShs 5,500
2. Rent is to be apportioned: Hardware 30 m², Textiles 20 m²
3. Insurance is to be apportioned on the basis of stock value

Required: Prepare Departmental Trading and Profit & Loss Account for the year ended 31 December 2023 and a Statement of Financial Position.

Solution

Step 1: Calculate Closing Stocks

• Closing Stock: Hardware = TShs 6,000; Textiles = TShs 5,500

Step 2: Allocate Expenses

Total floor space = 30 + 20 = 50 m²

• Rent for Hardware = (30/50) × TShs 3,600 = TShs 2,160
• Rent for Textiles = (20/50) × TShs 3,600 = TShs 1,440

Stock values for insurance: Hardware TShs 5,000 + TShs 6,000 = TShs 11,000; Textiles TShs 4,000 + TShs 5,500 = TShs 9,500; Total = TShs 20,500

• Insurance for Hardware = (11,000/20,500) × TShs 1,400 = TShs 751
• Insurance for Textiles = (9,500/20,500) × TShs 1,400 = TShs 649

Step 3: Prepare Departmental Trading Account

Step 4: Prepare Departmental Profit and Loss Account

Step 5: Statement of Financial Position as at 31 December 2023

Correction: The totals should balance. Let me recalculate: Total Assets = 12,000 + 11,500 + 8,000 + 15,000 = 46,500. Total Liabilities = 6,000 + 75,500 = 81,500. There's an imbalance — likely the capital figure needs adjustment. Using the accounting equation: Capital = Assets - Liabilities = 46,500 - 6,000 = 40,500. So Capital should be TShs 40,500.

Corrected Statement of Financial Position:

• The Statement of Financial Position must balance: Assets = Capital + Liabilities
• For manufacturing firms, calculate Cost of Production through the Manufacturing Account
• For partnerships, always maintain Capital and Current accounts separately
• For departmental stores, allocate indirect expenses using appropriate bases
• When a new partner joins, goodwill may need to be raised and shared among old partners
• When a partner retires, they receive payment including their share of capital, profit, and goodwill

In Tanzania, many wholesale shops like Mwalimu Nyerere Road markets in Dar es Salaam or local hardware stores operate as departmental businesses. A shopkeeper managing both a hardware section and a household goods section would need to allocate rent and electricity costs between departments to know which section is more profitable. Similarly, when two friends start a restaurant in Arusha as a partnership and a third friend joins later, they must calculate the new partner's capital contribution and adjust profit-sharing ratios, then prepare a proper Statement of Financial Position to show the updated financial position of the business.